PD-LGD correlation study: Evidence from the Russian corporate bond market
The capital adequacy ratio is one of the important regulatory requirement for banks, which indicates its willingness to cover losses in the event of borrowers’ defaults. The Probability of Default (PD) and Loss Given Default (LGD) are two core parameters of the internal risk rating models used to calculate regulatory capital under the assumption that PD and LGD are independent. Papers based on developed countries data provide evidence with the dependence to be positive. It causes that banks underestimate the level of a risk of its loan portfolio, while they do not take into account the existence of such relationship. This is the first paper which aims to estimate the relationship between PD and LGD for Russian public companies. A major conclusion of the research is that using Russian data one cannot argue for the presence of risk parameter dependence whereas research using developed countries’ data suggests there is a positive one. This implies there is no need to overcharge capital for Russian banks compared to their counterparts from developed countries.
The paper presents a review of stochastic framework for term structure modeling and shows comparative advantages of commonly used techniques. The main application of the research is coherent modeling of credit and interest rate risk for Euro zone issuers.
In textbook the main issues connected with organization of credit analysis in a commercial bank were considered. The role of credit analysis in risk management system is shown. The methodology and specific methods for assessing the creditworthiness of borrowers used by banks are set out by complex approach. The textbook includes international recommendations for introduction of internal credit risk assessment systems in banks. With the aim at presenting the material examples from the practice of commercial banks, analytical tables, diagrams and figures were used.
The aim of the article is to model dynamics of risks and assess the cyclical effect of Basel II in the Russian banking system.
In the paper some prominent features of a modern financial system are studied using the model of leverage dynamics. Asset securitization is considered as a major factor increasing aggregate debt and hence systems uncertainty and instability. A simple macrofinancial model includes a logistic equation of leverage dynamics that reveals origins of a financial bubble, thus corresponding closely to the Minsky financial instability hypothesis. Using ROA, ROE, and the interest rate as parameters, the model provides wide spectrum of leverage and default probability trajectories for the short and long run.
The paper considers the financial choice of entrepreneurs at their initial stage of development as a key criterion of a new firm potential riskiness. The main objective of the research is the methodology elaboration aimed at the numerical estimation of the role of informal financial resources involved in the small business creation. Two fundamental considerations have been tested. The former implies that informal investment is a substitution for unavailable formal sources, including venture capital (because of the lack of essential networks and connections with business associations). The latter performs the opposite concept of negative effects: economic reasoning discouragement and inefficient resources allocation. A special technique is introduced in order to measure the credit quality of early entrepreneurial activity and to estimate its contingency with the financial strategy. The methodology validation is realised under Global Entrepreneurship Monitor conceptual framework. The results are received for 42 countries in 2006-2007, depicting the influence of informal support on potential losses under the second consideration. As a result, informal investments are inefficient when the concentration of credit risk in the economy is rather high. Investorsђ expectations about the entrepreneurial growth of the firm are pessimistic, anticipated returns on investments are too low to be economically reasonable. The outcome leads to the irrecoverable losses, both financial (short-received profitability) and nonfinancial (decreased output, the lack of innovativeness, flexibility, and inventiveness).
The mortgage crisis that started in the U.S. in 2007 and lasted until 2009 was characterized by an unusually large number of defaults on the subprime mortgage market. As a result, it developed into a global economic recession and placed the stability of the world banking system in jeopardy. Therefore, the issues of credit risk modeling showed the shortcomings of the current credit risk practice. Truncation, or partial observability, and simultaneous equations bias causes sample selection bias. As a result, parameter estimates are biased and inconsistent. Firstly, we provide an overview of current approaches in the mortgage literature to control for the sample selection bias correction, such as the Heckman model and bivariate probit model with selection. Secondly, a review of the most significant mortgage studies discussing this problem is introduced. Specifically, different structural models, specific datasets and empirical results are regarded. In addition, we discuss such key credit risk determinants as borrower characteristics, terms of the mortgage contract, mortgage characteristics, and macroeconomic conditions. Finally, we conclude the discussion with possible research questions.
Smoking is a problem, bringing signifi cant social and economic costs to Russiansociety. However, ratifi cation of the World health organization Framework conventionon tobacco control makes it possible to improve Russian legislation accordingto the international standards. So, I describe some measures that should be taken bythe Russian authorities in the nearest future, and I examine their effi ciency. By studyingthe international evidence I analyze the impact of the smoke-free areas, advertisementand sponsorship bans, tax increases, etc. on the prevalence of smoking, cigaretteconsumption and some other indicators. I also investigate the obstacles confrontingthe Russian authorities when they introduce new policy measures and the public attitudetowards these measures. I conclude that there is a number of easy-to-implementanti-smoking activities that need no fi nancial resources but only a political will.
One of the most important indicators of company's success is the increase of its value. The article investigates traditional methods of company's value assessment and the evidence that the application of these methods is incorrect in the new stage of economy. So it is necessary to create a new method of valuation based on the new main sources of company's success that is its intellectual capital.